How Design Firm Utilizes Benchmarking to Drive Firm Profitability

Posted by Deltek on December 4, 2020

Managing AEC Firm Profitability

The current pandemic forced us to adapt – virtually overnight – and business leaders had to make quick decisions to keep their teams productive and profitable. How did architecture, engineering and construction (AEC) firms shift their strategy to meet their financial metrics and KPIs?

Discover best practices from Christine Taraska, CFO at Cube 3 Studio, a dynamic and responsive design firm of 100+ with the vision to provide thoughtful and innovative design solutions for a wide range of architectural, interior design, and planning challenges. Taraska shared how Cube 3 Studio is tackling financial planning in the new economic climate and lessons learned from the pandemic in Coffee & Clarity: Analyzing AEC Financial Trends for the Road Ahead.  

This year’s Deltek Clarity Architecture and Engineering Report indicates that AEC firms key challenges are increasing profitability, finding and retaining qualified staff, and managing growth. These were also top priorities at Cube 3 Studio this year, according to Taraska, and, even with all of the unexpected changes this year, the importance did not shift. Read on to discover how Cube 3 Studio is enabling their remote workforce, monitoring the industry and firm KPIs, and planning for 2021.


 

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Enabling the Remote Workforce

In March, Cube 3 Studio adapted their business to operate in the new work from home environment, shifting from employees very rarely working remotely to moving the entire team to remote working. Technology took on increased importance as Cube 3 Studio rapidly adopted a new way of working.

The first couple of weeks they ramped up their technology to get the equipment employees needed, such as video cameras and headsets. Overhead costs shifted as they balanced these unforeseen costs, but then other office expenses dropped off the radar such as food, coffee and water.

Cash flow and project management took on increased importance as uncertainty increased. “There’s certainly a different type of leadership needed during a period of uncertainly,” stated Taraska. “The most pressure was on the project managers to make sure they talked to all of their people, kept everyone on track, watched the hours that were budgeted for projects, and looked at what was spent on the actual projects,” she added. “We relied on the mid-level leadership in the company to make sure project management and project execution were working.”

Monitoring the Industry and Firm KPIs

To keep a pulse on the industry and company performance, Cube 3 Studio follows several reliable external sources of information, such as the Architectural Billing Index, while monitoring their Key Performance Indicators (KPIs) monthly against the Deltek Clarity Architecture and Engineering Report high performer benchmarks and their firm trends from the past five to seven years. Their ultimate goal is to become a high performer, and tracking the metrics helps.

Taraska explained, “If we can keep our performance indicators within a reasonable perimeter through all this chaos then we’re doing pretty good. If one is dropping off and we are not performing as well as we have in the past, we have to look at the reasons this is happening and if can we do anything to mitigate this and respond to it in a timely fashion.”


 

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Overhead Rate

Overhead rate is the most important KPI for Cube 3 Studio, according to Taraska. “With opening new offices and expansions we have to look at overhead costs,” she says. “There was a point where our results were going in the wrong direction, but if I can control overhead and I know that the Project Managers are managing the projects OK then we should be OK,” she added.

Profit to Earnings

Second to overhead rate is profit to earnings for Cube 3 Studio. They measure this to makes sure they stay profitable and this goes hand-in-hand with utilization.

Utilization Rate

Cube 3 Studio keeps a close eye on employee utilization rates, but they don’t only consider the billable work that is entered into an employee’s timesheet. Taraska explains, “It’s one thing if your utilization rate is high, but I’ve always been a big proponent of ‘what are we realizing with that?’ Somebody could go in and make themselves 80 or 90 percent billable, but if they’re not productive then that’s not any value to the company. Whereas if somebody is 75 percent billable but they are also doing x, y and z – such as general office support or business development – then that person is a lot more valuable. So it’s looking at profit to earnings, utilization, and net multiplier as another key indicator.”

Cash Flow

As 2020 moved into the fourth month of the year, cash flow became increasingly important. “Getting the PPE, looking at the projects, and thinking ‘what is the worst thing that can happen?’ became part of our processes,” said Taraska. She added, “Cash position is key to keep the company going and make sure we have enough cash to cover our costs. “

Accounts Payable

Taraska noticed that collecting accounts payable took on increased importance this year for many companies. They emphasized collecting past due invoices and looking into why they weren’t getting paid.

Planning for 2021

Looking ahead, Cube 3 Studio is becoming more pragmatic. Taraska stated, “I think there’s a little bit of a concern that we’re not through the woods yet with the coronavirus, nor with the economic impact of it, and that this could be more of a longer-term recovery. You have to rationalize and say if this is what happens to the economy, this is where I think we are going to go but we better be ready in case x, y and z happen. You can’t run an unlimited number of scenarios, but you have to make a very educated strategy on what you think will be the major challenges and where could we go.”

Cube 3 Studio is focusing on constantly moving things around and adjusting, both on the office side and with clients and project delivery. “There’s many bumps in the road. You have to realize that things are going to change. As an accountant you’re typically looking at historical things. 2020 has forced a lot of accountants to realize that historical and late timing isn’t going to work anymore. You’ve got to be right at the front,” said Taraska.

Get insight into critical KPIs and AEC priorities influencing the industry with this guide, Accounting & Finance Trends in the A&E Industry: A Clarity Mini-Report. Utilize the report to establish a baseline for your firm that helps guide critical financial planning and management decisions utilizing industry best practices. In its 41st year, the Deltek Clarity Architecture and Engineering Industry Study delivers trending topics, analysis, and benchmarks that directly impacting today’s industry landscape.